· Karson Lawrence · Finance · 8 min read
Cash Flow Crisis: The Silent Killer of Profitable Contracting Businesses
You can be profitable on paper and still go bankrupt. Cash flow management is the difference between contractors who survive and those who don't.
I’ve seen contractors with $3 million in annual revenue who can’t make payroll.
I’ve seen contractors with a 40% gross margin who are borrowing money at 18% interest just to buy materials.
I’ve seen contractors who land their biggest job ever—and it nearly kills their business.
Profit is not cash. Until you internalize this, you’re one bad month away from a crisis.
The Cash Flow Illusion
Here’s how it typically happens:
You’re busy. Really busy. Crews are working every day. Invoices are going out. Revenue is up 30% from last year.
The P&L looks great. Your accountant says you’re profitable.
But you can’t pay your suppliers. You’re floating credit cards. You’re delaying your own paycheck—again.
What’s happening?
The cash flow gap.
You’re spending money on labor and materials today. But you’re not collecting payment for 30, 45, or 60 days. In the meantime, your suppliers want their money, your techs want their paychecks, and your credit cards are maxing out.
Profit exists on paper. Cash exists in your bank account. They’re not the same thing.
Understanding the Cash Flow Cycle
Every contracting job has a cash flow timeline:
Day 0: Customer signs contract Day 1-5: You buy materials, pay suppliers Day 1-30: You pay labor as work progresses Day 30: Job complete, invoice sent Day 60: Customer pays (if you’re lucky) Day 75: Customer pays (more realistic)
The math:
- You’ve spent money on Days 1-30
- You get paid on Day 60-75
- That’s 45-75 days of funding the customer’s project with your money
Multiply this by every job, and you’re financing a significant portion of your annual revenue at any given time.
A contractor doing $2 million/year with 60-day average collections is financing roughly $330,000 of customer projects at all times.
Where does that money come from? Your working capital. And if you don’t have working capital, it comes from debt—or it doesn’t come at all.
The Six Cash Flow Killers
Killer 1: Slow Collections
The problem: Average days-to-pay keeps creeping up. 30 days becomes 45. 45 becomes 60. Customers learn they can pay you last because you don’t push.
The symptoms:
- A/R aging report shows increasing “60+ days” balance
- You’re calling the same customers repeatedly
- You’ve stopped tracking because the numbers are depressing
The fix:
- Clear payment terms on every contract (Net 15 is acceptable in many markets)
- Invoice within 24 hours of job completion
- Automated payment reminders at Day 7, 14, 21
- Phone call at Day 25
- Stop work protocol for customers over 30 days
The goal: Average collection under 30 days.
Killer 2: The Big Job Trap
The problem: You land a huge project—twice your normal size. You’re thrilled. But the cash requirements are also twice your normal size, and you don’t have the reserves.
The symptoms:
- Supplier credit is maxed out
- You’re taking deposits from other jobs to fund this one
- Material delivery is delayed because you can’t pay the supply house
The fix:
- Negotiate deposits and progress payments on large jobs (25% deposit, progress payments every 2 weeks)
- Build a line of credit BEFORE you need it
- Be willing to walk away from jobs that don’t have favorable payment terms
The reality: Some contractors lose money on their biggest jobs because the cash demands force them into expensive financing.
Killer 3: Seasonal Whiplash
The problem: HVAC contractors are flush in summer, broke in winter. Roofers boom after storms, then go silent. The cash comes in waves, but expenses don’t.
The symptoms:
- Flush with cash in busy season, you spend liberally
- Slow season hits and suddenly you’re scrambling
- You’re laying off techs you’ll have to rehire and retrain in three months
The fix:
- Monthly profit reserves (save 20% of gross profit during busy season)
- Maintenance agreements to smooth revenue
- Planned maintenance marketing in slow seasons
- Seasonal expense planning (reduce discretionary spending before slow season)
The model: Act like you make the same amount every month, even when you don’t.
Killer 4: Supplier Terms Squeeze
The problem: You used to have Net 30 with suppliers. But you were late a few times. Now it’s cash on delivery (COD). Your cash buffer just disappeared.
The symptoms:
- Supplier credit limits are maxed
- Some suppliers now require prepayment
- You’re juggling which suppliers to pay first
The fix:
- Rebuild relationships by paying on time for 90+ days
- Communicate proactively if you’re going to be late
- Have backup suppliers in case primary relationships fail
- Consider supplier financing programs
The long game: Your supplier relationships are worth protecting. A supplier who trusts you will extend credit when you need it most.
Killer 5: Equipment and Vehicle Purchases
The problem: You need a new truck. The salesman offers 0% financing if you buy today. You sign. Now you have a $2,000/month payment that doesn’t care how busy you are.
The symptoms:
- Monthly fixed expenses have crept up
- Truck payments feel like they’re killing you
- You’re equipment-rich and cash-poor
The fix:
- Finance longer than you think you need to (lower payments, preserve cash)
- Keep older vehicles in service longer
- Buy certified pre-owned instead of new
- Build a vehicle replacement fund (set aside monthly)
The principle: Cash flexibility matters more than low total cost. Paying $5,000 more in interest over five years beats running out of cash once.
Killer 6: Growth Without Capital
The problem: You’re growing fast. New trucks, new techs, bigger jobs. All of which require more working capital than you have.
The symptoms:
- Revenue up 30%, but bank balance unchanged
- Every new job requires scrambling for cash
- You’re running faster just to stay in place
The fix:
- Grow slower than you want to (sustainable beats fast)
- Secure a line of credit proportional to growth
- Don’t hire ahead of demand
- Don’t buy equipment until you need it
The rule of thumb: For every $100K in growth, you need an additional $15-25K in working capital.
The Cash Flow Dashboard
What you measure improves. Here’s what to track weekly:
The Daily Check
Bank balance: Know your number every morning.
Weekly Metrics
- A/R aging: Total outstanding and breakdown by 30/60/90 days
- A/P due: What you owe and when
- 13-week cash forecast: Where will you be in 3 months?
Monthly Metrics
- Days Sales Outstanding (DSO): How fast you collect
- Cash conversion cycle: Days between spending and collecting
- Working capital ratio: Current assets ÷ current liabilities
The target:
- DSO under 35 days
- Cash conversion cycle under 45 days
- Working capital ratio above 1.5
The 13-Week Cash Forecast
This is the most important financial tool for a contractor. Here’s how to build one:
Step 1: Create a spreadsheet with 13 weekly columns
Step 2: Start with current bank balance
Step 3: For each week, list expected:
- Cash in (collections, deposits, other income)
- Cash out (payroll, rent, loan payments, materials, other expenses)
Step 4: Calculate ending balance for each week
Step 5: Update weekly with actual numbers and revised forecasts
What you’re looking for:
- Weeks where the balance goes negative (danger)
- Weeks where large payments are due (plan ahead)
- Patterns across seasons (build reserves before slow periods)
The power: With a 13-week view, you see problems coming and can act proactively.
Emergency Cash Strategies
When cash gets tight, here’s the priority list:
Level 1: Accelerate Collections
- Call every customer who owes money
- Offer 2% discount for payment within 10 days
- Accept credit cards (yes, pay the fee—cash now beats cash later)
- Offer payment plans for slow-paying customers
Level 2: Slow Outflows
- Negotiate extended terms with suppliers (honest communication works)
- Delay non-critical expenses (equipment upgrades, training, etc.)
- Delay owner distributions
- Review subscriptions and recurring expenses for cuts
Level 3: Access Credit
- Draw on line of credit
- Equipment financing for any planned purchases
- Invoice factoring (sell receivables at a discount)
- SBA loans if you have time
Level 4: Difficult Decisions
- Pause hiring
- Reduce hours
- Layoffs
- Equipment sale and leaseback
The key: Act at Level 1 and 2. If you wait until Level 4, options are limited and consequences are severe.
Building a Cash Fortress
The goal isn’t just surviving cash crunches. It’s building a position where cash is never a constraint.
The Reserves Target
- Minimum: 30 days of operating expenses
- Comfortable: 60 days of operating expenses
- Fortress: 90+ days of operating expenses
A contractor with $150K in monthly expenses should hold $150-450K in cash reserves.
How to Build Reserves
Method 1: Profit allocation Set aside 10% of gross profit every month until you hit your target.
Method 2: Windfall capture Every unexpected profit (insurance settlement, tax refund, one-time large job) goes straight to reserves.
Method 3: Expense audit Cut unnecessary expenses and redirect the savings to reserves.
Method 4: Price increase A 3% price increase on $2M in revenue is $60K/year to reserves.
Where to Keep Reserves
- Not: Your main operating account (too easy to spend)
- Better: A separate savings account at the same bank
- Best: A separate bank entirely (out of sight, out of mind)
Reserves are for emergencies, not opportunities. Define what counts as an emergency before you touch them.
The Cash Flow Mindset
Everything in this article is tactics. But tactics only work with the right mindset:
Mindset 1: Profit Isn’t Real Until It’s Cash
A $50K job on paper means nothing if you can’t collect. Celebrate when the money hits the bank.
Mindset 2: Growth Costs Money
Fast growth consumes cash. Every new truck, tech, and tool requires working capital. Grow deliberately. For a structured approach, read our guide on scaling your contractor business.
Mindset 3: Revenue is Vanity, Profit is Sanity, Cash is Reality
Revenue tells you how busy you are. Profit tells you how efficient you are. Cash tells you whether you’ll survive.
Mindset 4: Cash Problems Are Always Predictable
With a 13-week forecast, you see problems coming. The contractors who get surprised weren’t looking.
Mindset 5: Your Job is Capital Allocation
As the owner, your core job isn’t doing the work. It’s deciding where money goes. Take that job seriously.
The Bottom Line
Profitable contractors go out of business every day. Not because they did bad work. Not because they charged too little. Not because their customers didn’t pay.
They failed because they ran out of cash.
Cash flow management isn’t exciting. It’s not why you got into contracting. But it’s the difference between building a business and building a job that eventually crushes you.
Track your cash daily. Forecast it weekly. Protect it fiercely.
Because profit is an opinion. Cash is a fact. And facts are what keep the doors open.
Struggling with cash flow in your contracting business? Book a free 20-minute strategy call to discuss your financial situation.
Related Reading:
